Barry McCaig: Signs of life in mergers and acquisitions a cause for hope

FIGURES published this week by the Office for National Statistics (ONS) indicated a significant revival in the level of merger and acquisition activity involving UK companies.

Although the picture remains mixed, there is valuable evidence to show momentum in the Scottish corporate transactions market is increasing.

The headline findings of the statistics are that:

n The value of UK domestic acquisitions in Q3 was 2.6 billion, up slightly from 2.1bn the previous quarter;

Hide Ad
Hide Ad

n There were fewer acquisitions of UK companies by other UK companies over the third quarter of the year, but the average value of those deals has increased dramatically (from 21 million in Q1 and 23m in Q2, to around 50m in Q3);

n The value of acquisitions in the UK by foreign companies is 12bn in Q3. This was an increase from 2.7bn in Q2;

n and expenditure on acquisitions abroad by UK companies also increased, from 2.4bn in Q2 to 5bn in Q3 - the highest quarterly value since quarter two 2008.

This is a really intriguing set of data, which will doubtless be of considerable interest to Scotland's dealmakers.

On one hand, the number of transactions has dipped to its lowest point this year, but on the other, the average value of those deals has more than doubled from around 21m to the 50m mark.

It's unclear whether this increase is down to a handful of blockbuster deals such as Babcock International's 1.5bn takeover of VT Group. However, there does seem to be renewed confidence that there are deals to be done.

It also remains to be seen whether Scottish businesses are starting to see some movement in access to corporate finance. This seems to have become one of the defining issues of the past couple of years. However, the business community and financiers seem to be showing signs of adjusting to the new rules of the game. We are seeing the introduction of more innovative funding structures and a return to the use of banking clubs or syndicates which allow funders to spread risk more effectively.

Further, there has been some positive movement in the private equity market. According to figures published by the European Venture Capital Association (EVCA), growth capital and smaller buyouts increased during the third quarter. Crucially, we are now seeing clubs or syndicates of banks supporting private equity with acquisition finance, though clearly not on the same scale as in 2005-7.

Hide Ad
Hide Ad

While no regional breakdown of the data is provided by the ONS or EVCA, growth is certainly not confined to Europe or the City.

Our own experience in Scotland suggests there is increased appetite for mergers and acquisitions. At this point last year law firms in Scotland claimed to have done around 268 deals worth more than 500,000 each.

However, research published at the same point this year shows that those firms claim to have done about 351 deals over the year.There may be an element of double count in there if more than one firm is acting on any one deal, but, even taking that into account, it would seem there is a general up tick in corporate activity.

In addition, if you look at some of the deals that have gone through since the end of the summer - the acquisition of Thistle Generators last week, the sale of Dana Petroleum, Swip's purchase of Longwood Road Retail Park in Northern Ireland and the sale of Faraday Retail Park in Coatbridge - there does seem to be a bit more confidence around.

People have moved from fighting for survival to thinking about whether they can grow through or, dare we say it, out of the recession, be that through the purchase of good quality businesses at the right price or the acquisition of distressed assets. Numbers published by the Committee of Scottish Clearing Banks yesterday, showing an apparent increase in start up businesses, reflect that impression of growing confidence.

We may not be back to the heady days of multi-billion deals every month, but things do seem to be improving.

• Barry McCaig is a partner in the corporate practice at law firm McGrigors.